How Does a Reverse Mortgage Work?

How does a reverse mortgage work and when it is a good idea to use one? This is a common question for homeowners over a certain age lately, and the reasons are obvious. Reverse mortgages are being promoted like crazy lately — on TV, on the radio, online, and even through direct mail marketing. But what is a reverse mortgage anyway, and how does it work. That’s the question we address in this dose of Mortgage Wisdom.

Here’s How It Works

Here’s how these financing tools work, in a nutshell. Reverse mortgages are usually limited to senior homeowners (people who are 62 or older). The basic premise is that you leverage the equity in your home to obtain financing. The payment usually comes in one of two forms — either a lump-sum payment, or monthly payments for as long as you live in the home.

This is where the name reverse mortgage comes from. Instead of using the loan to get a home, you are using your home to get the financing (sort of like a home equity loan). The repayment process is another unique aspect of a how a reverse mortgage works, so let’s talk about that.

The money provided through a reverse mortgage is repaid when one of the three things takes place. The loan is repaid when the homeowners either (A) sell the house, (B) move away from the home, or (C) are deceased.When one of these things occur, the lender will recoup the loan (plus interest) by selling off the property. Or, if the heirs take over the property and decide to keep it, they can pay off the lien resulting from the reverse mortgage loan.

Reverse Mortgage Pros and Cons

Understanding how a reverse mortgage loan works is just the first step in your decision-making process. You must also understand the various pros and cons associated with this financing tool, so that you can properly weigh your options. Every type of loan has certain advantages and disadvantages, and the reverse mortgage is no different.

• Pros — Allows you to leverage the equity in your home for financing. Does not need to be paid back until the home is sold or is the homeowner dies. Flexible payment options (lump sum versus regular payments).
• Cons — The up-front costs can be significant. Most lenders charge high closing costs and fees for reverse mortgages, higher than many other types of loans. Your heirs will take on the financial obligation after you die.

This article only explains the basics of how a reverse mortgage works, the pros and cons, etc. If you are considering this mode of financing, you should do much more thorough research into the subject. I recommend using government websites and educational websites (colleges and universities) when researching reverse mortgage loans. The people who sell these loans will only tell you the advantages. You need to seek out unbiased sources of information to get the whole picture.